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THE SPEAR REPORT
2558 Albany Ave., W. Hartford, CT 06127.
1 year, 50 issues, $297. www.spearreport.com.
Procter & Gamble: Playing ketchup
Gregory Spears: "Semiconductors have been on fire this year and a variety of consumer names have done well also, but Procter and Gamble (PG) has been languishing for about 18 months. This may be about to change. Markets are always playing the rotation game and it may be time for capital to shift from sizzle to soap. This means certain large-cap consumer product companies like PG will be playing catch-up.
P&G is a well-diversified company. They are a soap and shampoo company, a drug and vitamin company, a childcare company (diapers), an internet marketer, a coffee company, and so on. The recent buzz about P&G is the over-the-counter version of the heartburn medicine Prilosec, which is expected to be a multi-hundred million-dollar revenue source. Full-year earnings at P&G are anticipated to be in the $4.50 per share range and the company is forecasting low double-digit revenue growth. That's hard to do for a $100+billion company. The stock yields about a 2% dividend.
After they issued a nasty earnings warning in early 2000 the stock was cut in half and it has been creeping higher ever since. There is a high volatility zone just above the current price and PG could become a short-term momentum play if the rest of the market cooperates. It is a buy today."
UPSIDE
7412 Calumet Ave., Hammond, IN 46324.
Published monthly. Supplement to Dow Theory Forecasts.
Surf's up for Quiksilver
Richard Moroney: "Despite a tenuous retail backdrop, Quiksilver (NYSE ZQK $16) has more than held its own. The fast-growing maker of surf-oriented apparel has posted four straight quarters of double-digit earnings growth, while sales growth has topped 30% each of the last three quarters. Growth prospects remain bright, fueled by the company's reputation for authentic and innovative apparel. The stock, capable of reaching $19 to $21 over the next 12 months, is rated Buy.
Company Profile
Quiksilver, which began selling surf-inspired clothing in 1976, offers a diverse line of clothes, accessories, eyewear, watches and wetsuits. The company's main focus is apparel for young people sold under the Quiksilver, Roxy, Raisins, and Hawk Clothing labels. Quiksilver also makes snowboards, snowboard boots, and bindings. In fiscal 2002 ended October, sales were $705 million, up 14%. Earnings per share rose 31% to $0.77. Since 1993, sales have grown every year and per-share earnings have declined only once.
Quiksilver's products are sold through surf shops, skate and snowboard stores, specialty retailers, and national chains in the U.S., Europe, and Asia. Last year, international sales represented 40% of total revenue. The company's own retail chain, Quiksilver Boardriders Club, accounts for roughly 10% of sales. To reinforce the Quiksilver brand, the company sponsors a number of snowboard, surf, and skateboard contests.
July-quarter earnings per share rose 17% to $0.21, topping the consensus estimate of $0.19. Net income surged 35%, keyed by 44% revenue growth. Sales growth benefited from favorable foreign currency exchange rates, early product shipment, and new Asian operations. Gross profit margins hit 42.6%, up from 40.2%, a year earlier. Holiday bookings rose a solid 11%, driven by a 14% increase in Europe. Inventories in the Americas and Europe jumped 45% on a constant-dollar basis, but were in line with sales growth. Quiksilver ended the quarter with 126 company-owned stores, with 59 in the U.S., 53 in Europe, and 14 in Asia.
Quiksilver expects fiscal 2003 sales of $949 to $954 million, implying at least 35% growth. Per-share earnings are expected to jump 31% to $1.01. For 2004, management is comfortable with the consensus estimate of $1.18 per share. The stock trades at 16 times current-year profit estimates at a 13 times next-year profit estimate. Based on trailing earnings, the stock's five-year average P/E ratio is 17.
Conclusion
With strong sales and profit momentum, solid growth prospects, and a reasonable valuation, Quiksilver is an attractive holding among specialty apparel makers. The company's finances are in good shape. At the end of the July quarter, cash assets stood at $49 million. Long-term debt was $50 million, or only 10% of total capital. Per-share book value was $7.44, up from $5.60 a year earlier.
The stock comes with some risks. Quiksilver faces a host of competition. The company sells to the notoriously fickle adolescence market, where fashion trends can be fleeting. But demographics trends work in Quiksilver's favor the teen population is growing almost twice as fast as the total population. And teens have deep pockets. In 2002, it is estimated they spent more than $100 billion. An annual report for Quiksilver Inc. is available at 15202 Graham Street, Huntington Beach, CA 92649; (714) 889-2200."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $259.
Thar's gold in them that pills
Richard Moroney: "Pharmaceutical manufacturing is a profitable industry, and not just for drug makers. Publicly traded drug companies generated more than $85 billion in operating profits last year on $360 billion in sales. Industry sales have grown at an annualized rate of more than 11% over the last five years.
Any industry as large as the drug industry supports a host of suppliers, as well as companies to process and distribute products. In many cases, these suppliers and distributors share the same demographic advantages and recession resistance as pharmaceutical companies.
According to the trade group Pharmaceutical Research and Manufacturers of America, the cost to develop a new drug ballooned to $802 million in 2000 from $138 million in 1975. Those costs should continue to rise. Only one in 5,000 compounds screened will eventually become a new medicine, but growth stagnates without new drugs. The pharmaceutical industry is going to keep investing in R&D no matter what it costs. And it costs a lot.
Last year, publicly traded drug makers spent more than $46 billion on research and development. Companies that make laboratory supplies and research tools collect a big chunk of that R&D money.
There is also money to be made on the back end. According to the National Institute for Health Care Management, retail spending on prescription drugs topped $154 billion 2001 and had risen at least 17% for four consecutive years. That's where distributors and pharmacy-benefit managers come in. Somebody has to get the drugs to millions of individual consumers with ulcers or arthritis or high cholesterol.
So what does this mean to investors? It means that you can share in the long-term growth potential of the pharmaceutical industry without concentrating your money in the drug sector itself. Not all distributors are equipment makers have direct ties to the drug industry. But the five companies discussed below depend on drugs or drug companies for much of their income.
Delivery of pharmaceuticals and related services contributes more than 80% of Cardinal Health's (NYSE CAH $58) revenue and 50% of operating earnings. Cardinal also delivers medical supplies and provides technology services. While Cardinal's sales and operating profit have grown at an annualized rate of more than 28% over the last 10 years, growth has been slowing, and the company lowered its long-term profit-growth estimate to 15% from the 20% it used to project. Profit margins for Cardinal's drug-distribution business are on the decline, and the company is slowly de-emphasizing the drug-delivery business, planning to use much of its expected $1 billion cash flow this year for acquisitions and investments in other parts of its business. Cardinal appears fairly cheap at 16 times projected earnings of $3.69 per share in the year ending June 2004. But the company's financial disclosure is murky, and stiffening competition could limit future sales growth. Cardinal is rated Neutral.
Charles River Laboratories International (NYSE CRL $32) provides research animals and a variety of other products and services that aid in the development of drugs and consumer products. The company's more than 160 genetically specific breeds of research animals help drug makers test the safety of chemical compounds, as do its in-vitro technology and vaccine-support products. Charles River's alternatives to animal testing are gaining in popularity among consumer-products makers. Early this month, Charles River lowered its profit-growth targets because consolidation and financial troubles in the drug industry slowed demand for research animals. But strict expense controls should limit profit-margin erosion in the near-term. Charles River's long-term outlook remains bright because drug makers cannot cut back on R&D for long without giving up their competitive advantages. The stock is a Buy.
Medco Health Solutions (NYSE MHS $24) spun off by drug giant Merck (NYSE MRK $51) in August, is, by far, the largest pharmacy-benefit manager (PBM). Medco dispensed nearly 550 million prescriptions last year and currently handles about 20% of prescription claims in the U.S. That market power allows Medco to negotiate large discounts with drug makers on the front end and retail stores on the back end. Gains in the fast-growing mail-order market, coupled with a continuing trend toward the use of generic drugs, should fatten Medco's profit margins going forward. The stock is down 5% since spin-off, in part because of concerns about lawsuits over pricing and pharmacy practices, increasing competition, and a proposed merger between two rivals. Medco's legal and competitive challenges are already reflected in its price, and the stock is being added as a Long-Term Buy.
Omnicare (NYSE OCR $35) manages pharmacies and provides pharmacist consultants at nursing homes, assisted-living centers, and other institutional settings. The company also generates about 5% of its revenue from clinical-research services. While the company's strategy of growing through acquisitions is risky, Omnicare has done a good job of integrating its purchases and squeezing out efficiency gains. After two large purchases earlier this year, Omnicare serves about 981,000 patients. That scale should help boost profit margins over time through enhanced purchasing power and elimination of redundant facilities. Over the last five years, Omnicare's sales increased at an annualized rate of 24%, while operating profits grew at a 21% clip. Omnicare's debt has declined as a percentage of capital for the last two years, and the company has set a target debt/capital ratio of 35%. Omnicare is rated Buy.
Steris (NYSE STE $24) is best known for making equipment that cleans 6.5 billion medical devices every day. While hospitals are STERIS' largest target market, the company generates more than 20% of its sales from its life-sciences division. That unit sells contamination-control systems and services designed for drug makers and other companies that do laboratory research. Life science is STERIS' fastest-growing business segment. In the June quarter, STERIS added production capacity to accommodate strong demand for its research equipment. STERIS' life-sciences business has relatively low profit margins. But because of manufacturing improvements, the unit lost just $600,000 in the June quarter versus a loss of $3.2 million in the year-earlier quarter. This unit should become profitable in the year ending March 2004. STERIS, a Focus List Buy, trades at 18 times projected current-year earnings of $1.32 per share, a discount to other markers of medical supplies.
More Drug Beneficiaries
The three companies below also feed off the drug industry:
Sigma Aldrich ((NYSE SIAL $55) makes chemical and equipment used in laboratory research, many of which are designed for biotechnology and pharmaceutical companies. The stock is a Long-Term Buy.
Drugstore chain Walgreen (NYSE WAG $32) generates 60% of its revenue and almost all of its growth from prescription sales. Walgreen is a Long-Term Buy.
Waters (NYSE WAT $28) makes a variety of equipment used in the analysis, measurement, and purification of chemical compounds. Waters is rated Neutral."
NATE'S NOTES
PO Box 667, Healdsburg, CA 95448.
1 year, 12 issues, $150.
Celgene emerging as one of the
leading stocks of the current rally
Nate Pile: "As anticipated, Celgene (CELG) appears to be emerging as one of the leading stocks of the current market rally. While published results of yet another study using Thalomid to treat advanced stage metastatic melanoma and the issuance of additional patents related to the company's JNK program are partially responsible for the recent run-up in the stock price, the fact that the firm of Friedman Billings initiated coverage of the company with an "outperform" rating has also helped the stock maintain its forward momentum. Though our Portfolios have both become so heavily weighted in the stock that I feel it is only prudent for us to lighten up a bit as the stock heads higher, I strongly encourage new subscribers to establish a position in this core stock on any dips below the buy limit. I would be incredibly surprised if management had any intention of selling out in the near future, but given the depth of Celgene's ever expanding product portfolio, I also cannot help but wonder how much longer some of the large pharmaceutical companies will wait before at least trying to start "closed door" discussions with the company in an attempt to beef up their own pipelines (which seem to become less well-stocked with each passing year). I continue to believe we will see $100 per share or better before the current biotech bull market comes to an end, and I therefore encourage you to be patient when taking profits. CELG is a strong Buy under $32 and a Buy under $40."
THE LANCZ LETTER
2400 N. Reynolds Road, Toledo, OH 43615.
1 year, 15-17 issues, $250.
Biomet: A buying opportunity
for the long-term investor
Alan Lancz: "Biomet, Inc. (BMET $31.21), a Warsaw, Indiana based orthopedic device leader enjoys some of the highest margins in the medical device industry. Over the past few years gross margins have surpassed 70% and its net margins exceeded 20%. Management has done an excellent job in building a broad line of quality products, in combination with a well-motivated independent sales force. The company should also benefit from innovated new products on the horizon that should further entrench its stable group of orthopedic surgeons already sold on Biomet. Management has rewarded shareholders with a 67% increase in its dividend and nearly 40% increase in E.P.S. since 2001, and yet, Biomet's stock price is down approximately 10% from its highs of over two years ago. This presents a buying opportunity for the long-term investor as Biomet's excess cash flow should be smartly utilized to continue its share buyback program as well as regularly increase its annual dividend. The near-term prospects look bright with 3 5% price increases along with new products fueling both margin and sales growth. Over the long-term the demographics of an aging population only enhances its growth potential especially with over 60% of Biomet's sales in the reconstruction arena. An added catalyst is that the company has yet to make major inroads internationally as nearly 90% of its sales are still from the United States. This gives the company an attractive opportunity to fuel internal growth via new sales overseas, as management has focused on the vast and growing market in Japan to gain international market share. We feel Biomet is the right size being the fourth largest in its sector globally. It is small enough to maintain its high margins and sales growth with innovative high quality products that have a meaningful impact to its bottom line, yet large enough with a strong balance sheet and excellent management to not lose its competition advantage versus Zimmer-Centerpulse, Johnson & Johnson/Depuy and Stryker Corp. We strongly recommend purchase at current levels with a buy limit of $33 and a two-year price target of over $40 a share."
WALL STREET FORECASTER
Ste. 700, 250 Liston Rd., Buffalo, NY 14223.
Monthly, 1 year, $99. Weekly Hotline. For info. 888-292-0296.
Top telecoms offer low-risk gains
Patrick McKeough: "Strong competition has hindered growth at Verizon and Alltel, but both companies still dominate their local markets. They are also using their steady cash flows to pay down debt, and expand their faster growing wireless and long distance businesses.
Verizon Communications (NYSE VZ $33; WSSF Rating: Average) was formed in June 2000 by the merger of GTE Corp. and Bell Atlantic. It is the nation's largest local telephone service provider, with roughly 138 million customer access lines in 29 states. Verizon Wireless, the company's 55%-owned joint venture with UK-based Vodafone Group, is the United States' largest wireless provider, with 34.6 million customers in all 50 states. Verizon also provides telecom services in over 30 other countries.
Revenues grew from $64.7 billion in 2000 to $67.6 billion in 2002. Profits from continuing operations and before unusual items included up from $2.92 a share (total $8.1 billion) in 2000 to $3.05 a share (total $8.4 billion) in 2002.
In the second quarter of 2003, Verizon earned $0.12 a share (total $338 million), compared with a loss of $0.78 a share (total $2.1 billion) a year earlier.
However, if you exclude restructuring costs and other special items, profits fell 10.4%, to $0.69 a share (total $1.9 billion) from $0.77 a share (total $2.1 billion). Revenues crept up to $16.83 billion from $16.75 billion. Strong growth in wireless (revenues up 15.6%) and long distance (up 17.2%) offset weakness from local service (down 4.1%).
Verizon's long distance revenues should grow quickly, now that it can sell long distance service to its local service customers. Verizon is now the third-largest long distance company in the nation, behind AT&T and MCI.
In September 2003, Verizon and two of its biggest unions agreed to new labor contracts that should save the company roughly $100 million a year in health care costs over the next five years. These contracts greatly reduce Verizon's risk since they cover about a third of its workers, and give the company the flexibility to trim its workforce if necessary.
These savings should also help Verizon improve its balance sheet. It cut its long-term debt from 1.4 times equity at the end of 2002 to 1.1 times at June 30, 2003. However, intangible assets account for 28% of Verizon's total assets, and 1.4 times equity.
The stock now trades for 12.7 times the $2.60 a share it should earn this year before special items. The $1.54 dividend yields 4.7%.
Verizon is a buy.
Alltel Corp. (NYSE AT $45; WSSF Rating: Average) provides telecommunication services to over 12 million customers in 26 states, mainly in rural areas. Its wireless service business is the nation's sixth largest with 7.9 million customers. Other businesses include phone directories, call centers, paging, information processing management and retail stores.
Unlike Verizon, which gets most of its revenue and profit from local service, wireless is Alltel's largest business, providing roughly 60% of its revenue and 55% of its profit. This makes it less vulnerable to increased competition in its local service markets. Alltel's focus on smaller cities and rural areas also makes it difficult for rivals to enter its markets.
Alltel has a roaming agreement with Verizon, which allows its wireless customers to use their phones in Verizon's territories, and vice versa. This cuts the risk that Verizon will emerge as a wireless competitor.
Alltel is also doing a good job holding onto subscribers and signing up new ones by bundling high-speed Internet access, long distance and other services into attractively priced packages.
Revenues grew steadily in the last five years, from $5.2 billion in 1998 to $8.0 billion in 2002.
Profits before non-recurring items rose from $2.09 a share in 1998 to $2.70 a share in 2000. Profits in 2001 fell to $2.67 a share, but the acquisition of several wireless and local telephone properties raised Alltel's 2002 earnings to $2.92 a share.
In the three months ended June 30, 2003, the company's profits soared to $1.75 a share from $0.69 a share a year earlier. However, the latest figure included a $1.03 a share gain from the sale of the financial services unit of Alltel's information services business. If you also disregard writedowns and other one-time items, per-share profits rose 9.9%, to $0.78 from $0.71. Revenues from ongoing operations rose 17.6%, to $2.0 billion from $1.7 billion.
Alltel used most of the cash from the asset sale to cut its long-term debt, from 1.0 times equity at December 31, 2002 to 0.8 times at June 30, 2003.
The sales also raised Alltel's cash from $0.43 a share to $1.59 a share. The company will probably cut its long-term debt by a further 10% in the second half of 1003.
Alltel should earn $3.20 a share before non-recurring items in 2003, and the stock now trades for 14.1 times that figure. The company has raised its currently dividend every year since 1984. The current annual rate of $1.40 yields 3.1%.
INVESTOR'S VALUEVIEW
2240 Winter Woods Blvd., Suite 1010, Winter Park, FL 32792.
Monthly, 1 year, $129.
Toy'R'Us: The only national chain with
a baby-goods focus, and a solid reputation
Scott Pearson recently featured Toys`R'Us (TOY), one of the world's leading retailers of toys, baby items, and children's clothes. "The company operates nearly 1600 stores worldwide, including Toys`R' Us (681 stores), Babies`R'Us (185 stores), Kids`R' Us (146 remaining, down from a high of 215 in 1998), Imaginarium (37), and Geoffrey stores (4 experimental stores), in addition to the Toysrus.com and related websites, which are operated jointly with Amazon.com, and the international operations (289 company-owned stores, plus 255 franchised stores).
The Toys`R'Us story began in 1948, when Charles Lazarus opened a baby furniture store in Washington, DC. In the years to come, the chain would go through many transitions, but we believe it may be coming full circle. For, while Geoffrey the Giraffe is among the most recognized advertising "personalities" in the U.S., we believe the future of this company lies, not with Toys`R'Us primarily, but with the Babies`R'Us chain.
Already, Babies`R'Us represents 14% of company sales and 37% of operating profits. As this division grows, it will represent a greater portion of total sales, and the faster-growing division will begin to dominate the overall company outlook.
A close look at the company's financial statements shows that Toys' growth is nearly flat, yet still remains substantially profitable. The international stores, however, are showing good growth and sales at the web division are growing rapidly, through it has yet to show a profit. The Kids`R'Us division's results are dismal, explaining the frequent closings. Babies', however, is the company's primary growth engine. Since its formation in 1996, and major expansion in 1997 with the acquisition of the Baby Superstore chain, Babies`R'Us has demonstrated substantial growth, and provides the company with year-round profits (the Toy industry generally shows losses except for the Christmas season). As one mother recently told me, "Everybody registers their baby at the Babies`R'Us Baby Registry. After all, where else could they go?" Indeed, in this age of distant grandparents, and expanded gift obligations, such a baby registry is a magical thing. To be the only national chain with a baby-goods focus, and a solid reputation, is golden. We believe the Babies`R'Us division will continue to see growth for many years as it expands into new cities. Special promotions like Baby Fest weekends and grandparent-targeting are also expected to enhance growth opportunities. As we enter another baby boom period, we expect the company to handle the opportunity well. Management has handled the growth at Babies' very effectively.
Recently, the President of the successful Babies`R'Us chain also took responsibility for the struggling Kids`R'Us line. We hope his expertise can turn around this drag on earnings. Kids`R'Us, which specializes in children's clothing, hasn't had a profitable quarter in years, and we hope the new management will devise a way to get out from under this losing division. In the alternative, we believe they will, at least find ways to cut costs and reduce losses. We also expect to see more closures or conversions of the Kids' stores to more profitable concepts. The company sees the new Geoffrey line, which integrates events and activities with everything from shopping to hair care, as a potential new profit center, too, and may be a good use for the Kids' store leases.
Optimistically, Toys`R'Us should earn $2 per share and carry a P/E of 20. At worst, it should sell at a modest discount to its book value. Thus, we'd chart out a normal high-low price range of 1240. While some of these numbers sound foolishly optimistic today, we believe the demographic trends will yield optimistic results in coming years. The realistic bottom for the share price is in the $10 range, regardless of short-term foibles.
On the other hand, the realistic top is probably somewhere in the mid-20's, even without significant upward momentum. If earnings begin to turn around significantly, the share price could very easily rise above that point, while we believe the potential for falling far below $10 is miniscule. Thus, the upside potential is far greater than the downside always a good position.
The "book value" of Toys`R'Us, which indicates the accounting value of each share, is $18.93 per share. This suggests that the value of the company's assets may be more than the shares are selling for, another positive for any investor.
Company-wide earnings have been lackluster all through the '90's, but the company just finished a major 3-year restructuring, which we believe will lead to at least modest improvement. We also believe these shares have been mostly beaten down by negative sentiment regarding the domestic toy market. We would point out that domestic toys account for, at best, 59% of sales and earnings, and will likely represent an increasingly small percentage of the company. Finally, we believe the potential for improvement under solid management is high, as the company moves to expand the successful Babies' format and reduce the failing Kids' line, while improving store layouts in all stores.
In summary, Toys`R'Us is an ideal situation. We see a growth engine in Babies`R'Us, obscured by a bigger name toy store, and a bargain price tag for the shares. It's hard to find anything wrong with this pick, and we recommend these shares for all accounts."
Roger Conrad's UTILITY FORECASTER
1750 Old Meadow Road, Suite 301, McLean VA 22012.
Monthly, 1 year, $129.
Kelda Group: Poised to profit
on both sides of the pond
Roger Conrad: "Clean water's cost is rising in Britain as well as in the U.S. New Core Holding Kelda Group (OTC KELGF) is poised to profit on both sides of the pond. The Yorkshire Water unit serves 4.5 million people and is consistently rated highly by regulators for efficiency and quality.
In the U.S., it serves some 211,000 accounts in Connecticut, Maine, New Hampshire and New York due to the purchase of Aquarion in 2000 and American Water Works' systems last year.
Fiscal 2003 results testify to the steadiness of the whole: "Group turnover" or sales rose 4.8 percent, fueling an 8.4 percent jump in earnings per share and a 2.2 percent hike in the well-covered, semi-annual dividend. Those figures are likely to improve as the company reaches a new deal with British regulators to pass through an estimated $2.2 billion in upgrades at Yorkshire in rates.
Kelda is still absorbing small water systems but only conservatively enough to hold the solid A credit rating. The sale of unregulated operations in water recycling (UK) and timber development (US) has boosted cash.
Unlike most U.S. water utilities, Kelda is cheap, selling for barely 11 times projected fiscal 2004 earnings, only 97 percent of book value and a yield of more than 6 percent.
Investors can either buy Kelda's American Depositary Receipts over the counter up to 8 or the ordinaries traded on its home London Stock Exchange up to 4.30 pounds. ($7)."
OTC GROWTH STOCK WATCH
300 Chestnut St., Ste. 200, Needham, MA 02492.
Monthly, 1 year, $299.
Interpole International provides
innovative products for spinal surgery
Geoffrey Eiten: "The stock averages should continue to consolidate through a relatively narrow range through the remainder of the year, and then proceed through the highs of last month in early 2004.
Interpore International, Inc. (Nasdaq BONZ www.interpore.com) designs, develops, manufactures and markets a number of products for spine, orthobiologic (biomaterials used in orthopedic, or bone-related, applications) and minimally invasive surgery applications. The Company's products address two of the fastest growing areas in the medical device industry: spinal implants and orthobiologics, and are used by orthopedic surgeons and neurosurgeons around the globe in a wide range of applications.
Products include: Pro Osteon, a line of bone graft substitutes derived from coral; the Synergy Spinal System, which stabilizes vertebrae during spine fusion surgery; and BonePlast, a plaster-of-paris resorbable filler. Interpore also makes orthobiologic products based on autologous growth factors, which are concentrates derived from platelets to encourage bone growth.
According to the Company, virtually all spine fusion procedures require the use of a bone graft and a majority of thee procedures also use spinal implants. Interpore International offers three distinct product lines that can be used in combination for spinal fusions: spinal implants, bone graft materials and products used to derive growth factors. Because spine surgeons are the primary customers for each of its product lines, the Company's complementary product portfolio provides substantial cross selling opportunities to its distribution network.
Industry
According to the Company, the number of spine fusion procedures performed annually in the United States is estimated to exceed 400,000. Advanced cases of spine disorders can require that surgeons remove all or part of a damaged disc and/or fuse two or more adjoining vertebrae together. A fusion involves the placement of bone graft material between two vertebrae and may involve the use of spinal implants to immobilize the vertebrae while they fuse together. The bone graft is intended to provide a matrix that facilitates new bone in-growth. Complete formation of new bone may take six to eighteen months. For many years, surgeons have sought a means to increase the rate of new bone formation at a surgical site. However, until recently, no growth inducing agents were commercially available.
Interpore International estimates that product sales in the U.S. spinal implant market are divided approximately as follows: 59% in the thoracolumbar spine generally using posterior instrumentation systems (i.e. hooks, rods and screws), 23% in the cervical spine using anterior plates or posterior instrumentation systems, and 18% using intervertebral devices, often referred to as spine cages.
Grafting Profits
Interpore International's proprietary products make surgeon's jobs easier and are seemingly more effective solutions in the realm of orthobiologics and spinal implants. Judging by recent results, Interpore International management is growing its bottom line by carefully increasing distribution networks both domestically and internationally while developing its distinctive product line organically. Look for solid growth as the Company's products, use and distribution networks gain continued acceptance in the medical realm."
THE TURNAROUND LETTER
225 Friend St., Boston, MA 02114.
Monthly, 1 year, $195.
Baxter International: Long-term
investors will be rewarded
George Putnam: "Background: Baxter International (NYSE BAX) is one of the largest medical instrument and supply companies in the world, with a focus on products for the blood and circulatory system that range from medical devices and pharmaceuticals to biotechnology products. Founded in 1931, the company began to take its current form after a 1985 merger with American Hospital Supply Corp.
Operations are broken into three business units: Medication Delivery (41% of 2002 sales), BioScience (38%), and Renal (21%). Baxter has a long history of product innovation, including intravenous infusion, kidney dialysis, and hemophilia therapy, and it has a significant pipeline of new products in all divisions. Just over half of revenues are from outside the U.S.
After rising steadily throughout most of the 1990's Baxter's stock peaked at nearly 60 in early 2002, but it fell sharply in the second quarter last year as intensifying competition in the blood plasma products market depressed earnings. Then earlier this year, the stock took a double hit when reduced earnings guidance from management was followed by news of a Justice Department investigation of Baxter's dialysis business.
Analysis: Wall Street hates stocks where management reduces guidance it means that the analysts actually have to do some analyzing on their own and Baxter has been guilty of this crime several times over the last year or so. Short-term earnings may remain under pressure for a while, but we think Baxter will reward investors who are willing to take a longer-term view.
The company is a market leader in most of its lines of business, and growth prospects for the whole industry look strong. As pricing pressures in the blood plasma area abate and Baxter introduces new products, the company should be able to regain the confidence of investors.
Even as sales continue to grow steadily, management is taking a number of steps to improve the bottom line. It is reducing headcount and shutting down 30 facilities around the world. The company is also re-prioritizing its research and development efforts to focus on the areas with the greatest profit potential.
Baxter continues to bring out new products. It recently received FDA approval for its next-generation blood-clotting product, Advate. Though the market for blood-clotting products is very competitive, Advate, as the first hemophilia treatment not using human or animal protein, is a major safety advance.
Despite all the gloom on Wall Street about the stock, it's not as though the company is in trouble. It is expected to earn perhaps $1.75 per share this year and $2.00 or more next year. On a price-to-earnings basis, the stock trades at a considerable discount to its peers. As earnings get back on track, this discount in the multiple should disappear, and a rising multiple applied to rising earnings would give the stock a big boost. We recommend buying Baxter up to 35."
BETTER INVESTING
711 W Thirteen Mile Rd., Madison Heights, MI 48071.
Monthly, 1 year, $24.
Williams-Sonoma leading marketer
of high-end home furnishings
Kevin Lamiman: "Given threats to travelers from episode like the SARS epidemic and terrorist attacks, it's no wonder the home furnishings industry expects consumers to stay put and perhaps do more home entertaining. Any such "nesting" tendency among Americans may help explain the recent success of Williams-Sonoma, Inc., a leading marketer of high-end home furnishings.
Despite the soft economy and difficult retail environment of recent times, Williams-Sonoma (NYSE WSM) is sustaining the high growth rates it has long been known for. The company added 63 stores in fiscal 2002 (ended Feb. 2, 2003), a 15-percent rise. Its same store sales (sales in stores open at least 12 months) grew 2.7 percent, compared with growth of 1.7 percent in fiscal 2001.
The company's annual growth in earnings has averaged about 30 percent over the past 10 years, Value Line reports. Believing recent stock valuations may not accurately reflect the quality and growth potential of this company, Better Investing's Editorial Advisory and Securities review Committee selected Williams-Sonoma, Inc., as the "October Stock to Study".
Corporate Story
Williams-Sonoma combines the name of its founder and the location of his first store. In 1954 Charles Williams purchased a hardware store in Sonoma, CA. He quickly transformed the business into a high-end cookware shop, an expression of his love for French cuisine. In 1958 he moved the business to San Francisco, where the company remains headquartered.
In the late 1970s Williams sold the business to Howard Lester, an Oklahoma entrepreneur. Lester, now 67, remains on the board as chairman. Williams, 87, is vice chairman. They took the company public in the early 1980s.
In 2001 Lester stepped down as CEO in favor of Dale Hilpert, a former executive of the Venator Group (now Foot Locker, Inc.). Hilpert left the company early this year and was replaced by Edward Mueller, 55, former head of Ameritech and a member of the Williams-Sonoma board for several years.
In fiscal 2002 Williams-Sonoma had about 32,000 employees 6,000 of them full-time. The company employed about 15,000 temporary workers.
Marketing Framework
The company employs a multichannel strategy that combines store, catalog and Internet marketing built on each of its four primary retail concepts. Each segment stocks merchandise intended to appeal to a different demographic group. And with each new concept launch, Williams-Sonoma has the opportunity to grab more market share.
In fiscal year 2002 its 478 retail stores generated about 60 percent of sales. The remainder was derived from the mail-order side of the business, which includes eight catalog titles and several Web sites.
Retail sales totaled just over $1.4 billion, up 15.2 percent from more than $1.2 billion in fiscal 2001. The mail-order business direct-to-customer sales and revenue from shipping fees produced $944.2 million in fiscal 2002, up 10.2 percent from $856.9 million the year before.
Williams-Sonoma, the company's oldest and largest segment, markets high-end merchandise for the kitchen and dining room cookware, cookbooks and dinnerware, for example. At the end of fiscal 2002 the segment was operating 236 stores, and same-store sales increased 3.3 percent versus 4.2 percent the year before. (Williams-Sonoma breaks down results for the individual groups in no other way.)
Pottery Barn is a chain of 159 stores specializing in tableware and contemporary home furnishings such as furniture, bedding, rugs, window treatments, lighting and decorative accessories. This segment reported a same-store sales increase of 2.6 percent, compared with flat sales in fiscal 2001.
Building on its Pottery Barn concept, the company launched Pottery Barn Kids in 1999. The unit markets home furnishings geared to children. It had 56 stores at the end of fiscal 2002. Same-store sales decreased 0.3 percent, versus a 10.4 percent increase the year before.
In yet another Pottery Barn spin-off, Williams-Sonoma launched its PBteen catalog in April 2003. The new effort markets furnishings for bedroom, study and lounge areas. It's aimed at the underserved teenage market, estimated to be 40-million strong.
Hold Everything is a chain of 13 stores marketing home storage products. The unit's same-store sales fell 5.4 percent, compared with an 8.5 percent decline the year before.
The company also was operating 14 outlet stores at the end of fiscal 2002. Same-store sales rose 4.3 percent, versus 6.9 percent the year before.
Other Developments
Management estimates it will have increased its total leased retail square footage 9 percent to 11 percent by the end of fiscal 2003.
In mid-2002 the company launched West Elm, a catalog operation offering products like those offered through Pottery Barn but with prices about 60 percent lower.
Two years ago the company entered the Canadian market, opening five stores in Toronto.
The company has boosted inventory levels in recent quarters after being out of stock more often than expected during fiscal 2002.
In fiscal 2002 Williams-Sonoma achieved a pre-tax margin of 8.6 percent, a record for the company. (The recent average for the household goods and hardware retail sector was 3.2 percent, Dow Jones reports.)
Williams-Sonoma ended fiscal year 2002 with more than $193 million in cash and very little debt.
Catalog circulation grew to 280 million copies during fiscal 2002, and Internet sales increased 51 percent.
Performance Results
Williams-Sonoma's net income, excluding special items, totaled $124.4 million in fiscal year 2002 (ended Feb. 2, 2003), up 65.6 percent from $75.1 million in fiscal 2001. Diluted earnings per share totaled $1.04, versus fiscal 2001's $.65. Net revenues amounted to almost $2.4 billion, up 13.1 percent from $2.1 billion the year before.
Excluding special items, net income stood at $13.4 million for first-quarter 2003, (ended May 4, 2003), a 13-percent decrease from $15.4 million in the year-earlier period. Diluted EPS totaled $.11, compared with $.13 in the year-earlier quarter. Net revenues amounted to $536.8 million, up 12.2 percent from $478.4 million a year earlier.
Financial Expectations
In mid-August Value Line analyst Deborah Y. Fung projected 19-percent long-term annual earnings growth for Williams-Sonoma and diluted EPS of $1.25 for fiscal 2003. Ms. Fund concluded that this neutrally ranked stock (WSM) offers good price-appreciation potential out to 2006-2008. At www.quicken.com/investments/estimates, 17 institutions were reported to have analysts following the company. The consensus estimate in mid-August was that its earnings would grow at an average annual rate of 20.4 percent over the next five years.
The company's board authorized 2-for-1 stock splits in 2002 and 1998. Williams-Sonoma pays no cash dividends. The board has, however, had stock buybacks. In fourth-quarter 2002, for example, Williams-Sonoma repurchased 2 million common shares. Since then the board has authorized the repurchase of 2 million more.
Based on EPS of $1.04 for the fiscal year ended Feb. 2, 2003, the price-earnings ratio was 28 near press time. This compares to a high P/E of 53.9 in 1999 and a low P/E of 15.4 in 2001. With the projected EPS of $1.25 for fiscal 2004, the P/E would be 23.3 at the recent share price.
The PEG ratio the P/E of 28 relative to Value Line's 19 percent long-term growth estimate is 1.5, t the top of the 1.0 to 1.5 range generally cited as attractive valuation in the current market."
Editor's Note: For information about Williams-Sonoma, Inc., contact Steve Nelson, Director, Investor Relations, 3250 Van Ness Ave., San Francisco, CA 94109, website: www.williams-sonomainc.com.
The Better Investing National Convention will be held October 31-November 2 in Norfolk, VA. Better Investing is the official publication of the National Association of Investors Corporation (NAIC), which provides guidance to investment clubs across America. Guest speakers will lend their expertise in helping to make your investment club a success. There are 70 scheduled seminars. Presentations by major corporations. For more information or to register visit www.better-investing.org/biconvention.
SUPERSTOCK INVESTOR
1900 Glades Rd., Ste. 441, Boca Raton, FL 33431.
Monthly, 1 year, $395.
American Shared Hospital Services
opens 17th Gamma Knife unit
Sven Monberg: "American Shared Hospital is considered an exceptionally Strong Buy at these levels. American Shared Hospital Services (Amex AMS) is way under the radar screen of most healthcare-related industry watchers. AMS is at an inflection point now that serves a very serious look for anyone searching for a "businessman's risk" investment with potentially extraordinary upside potential for the right reasons: accelerating revenues and earnings, and possibly new markets that could eclipse the established use of Gamma Knife technology. AMS announced its 17th Gamma Knife unit started treating patients at the end of September at Lovelace Sandia Health System's Albuquerque Regional Medical Center in Albuquerque, New Mexico. AMS is the world's largest owner of Gamma Knife radiosurgery services.
American Shared Hospital Services is building a profitable medical services company in an underserved niche: turnkey technology solutions for advanced radiosurgical procedures. The company's core business is supplying hospitals with the Gamma Knife a non-invasive treatment for malignant and benign brain tumors, vascular malformations and trigeminal neuralgia (facial pain). The Gamma Knife, the gold standard in radiosurgery, reduces surgical risk and patient discomfort, resulting in a shorter hospital stay and lower risk of complications. In most cases, Gamma Knife patients resume their normal activities within a few days of treatment, compared to weeks or months for patients who undergo conventional surgery. More than 200,000 patients worldwide have already received this treatment. American Shared Hospital Services is the world leader in providing Gamma Knife Radiosurgery services.
The Gamma knife is not actually a knife. It is a medical instrument that emits finely focused beams of gamma radiation at the location of the brain disorder with minimal effect on normal surrounding tissue and without the usual risks associated with surgery or incision.
For trailing twelve months ending June 30, 2003 AMS generated income of $1.141 million or $0.22 per share, and currently pays a $.016 per share dividend. At a stock price of $5.25 per share that equals a 3.04% dividend return paid quarterly. As of June 30, 2003 AMS has a cash balance of approximately $11,080 000 or $2.16 compared to $9,924,000 or about $1.94 per share as of December 31, 2002.
Treatments for centers open more than one year grew 9% in the first two quarters of 2003 compared to the first two quarters of 2002. These statistics clearly show that Gamma Knife technology is gaining steadily higher acceptance in the U.S.
To conclude, we have a company that could raise the dividend payout with dramatically better cash flow numbers during the next couple of years as a result of the amortization schedules taking their course. However, the company believes the business should continue to grow in the mid-double digits for the foreseeable future as demand for Gamma Knife services is growing quite nicely, as evidenced by the increase in AMS's unit usage rates, and the prospects of applying Gamma Knife technology to tumors and related abnormalities in other areas of the body.
There is also the change that a larger healthcare company, or possibly Elekta, might opt to acquire AMS as confidence in the increasing growth rate for Gamma Knife radiosurgery services becomes more widely understood. Elekta may regard such an acquisition as a good business decision and as a mean to gain a more direct presence in the projects that 21 Gamma Knife site should be in operation by the third quarter of 2004, better than a 23% increase over current capacity."
PEARSON INVESTMENT LETTER
6431 Rubia Circle, Apollo Beach, FL 33572.
Published monthly for clients of Pearson Capital, Inc.
Investing for income
Walter Pearson: A mistake many people are making today is letting fear rule their investment decisions. There is no fault to be found with being careful. There is no fault to be found with being very careful. Where the average investor fails is in not evaluating the whole problem.
Because of the recent down market, many people have "run for the hills." Some have decided to go into CD's or money market accounts, but they have forgotten to factor in inflation. Inflation will not go away. It is built into our economy and is a factor that must be covered.
When putting one's savings into a CD that will pay 3% a year for the next five years, most people consider that they have made a perfectly safe investment. Not so! Let's compute a $10,000 investment for this period. With the inflation rate averaging 7% a year we come up with these figures:
For the first year the $300 is paid and spent normally, but the second year finds that the $300 has a purchasing power of $279. The third year it is $259.47, the next year $241.30, and the last year only $224.42. Furthermore, when the $10,000 is returned, the value may seem the same, but it has shrunk to where its purchasing power only comes to $6,956.88. This may seem criminal, but that's the way things are these days, and it is up to the investor to overcome this problem.
It is still possible to invest in the stock market for both income and safety. There are numerous companies that have long glowing records of dividend payouts. However, one of the things that should be considered is growth. In order to counteract the inflation bugaboo, it is necessary to factor in a certain amount of growth.
Recommended Growth & Income Stocks
Classic Bancshares, Inc. (Nasdaq CLAS $34.10) is a community-oriented financial institution. Classic Bank seeks to serve the financial needs of communities in its market area through eight banking offices in Eastern and Northeastern Kentucky. Its current business strategy involves attracting deposits from the general public and using such deposits, together with other funds, to originate commercial, consumer and other loans in its market areas. For the three months ended 6/30/03, total interest income increased 4% to $3.7 million. Net interest income after loan provision rose 14% to $2.4 million. Net income rose 14% to $745 thousand. Net interest income reflects an increase in the average balance of interest-earning assets and a lower cost of funds. Net income also reflects increased service charges and gains on the sale of securities.
Texas Regional Bancshares, Inc. (Nasdaq TRBS $33.79) is a bank holding company that operates Texas Regional Delaware, Inc., incorporated as a wholly owned, second-tier bank holding company subsidiary. Texas Regional Delaware owns Texas State Bank (the Bank), the Company's primary operating subsidiary. The Bank has two active wholly owned subsidiaries, TSB Securities, Inc., which provides full-service broker-dealer services, and TSB Properties, Inc., which receives and liquidates foreclosed assets. For the six months ended 6/03, interest income rose 7% to $104 million. Net interest income after loan loss provision rose 15% to $65.2 million. Net income rose 20% to $30.8 million. Net interest income reflects an increase in earning assets, and lower interest costs on deposits. Earnings also reflect higher service charges."
Editor's Note: Walter Pearson is the former President of First New England Securities, Co. He is the author of the book, "Investing for the Millions" and Publisher Emeritus for the Pearson Investment Letter. At present, Mr. Pearson serves as Chairman of the Board of Pearson Capital, Inc. For more information on managed accounts call 1-800-510-0329 or visit the web site at www.pearsoncapitalinc.com.
THE LYKE REPORT
P.O. Box 290, Glenview, IL 60025.
Monthly, 1 year, $89.
Coinstar Machinery recycles
33.2 billion coins during 2002
John Lyke: Coinstar's network of more than 10,000 coin recycling machines in the United States recycled 33.2 billion coins, representing $1.7 billion back into the economy in 2002.
That figure represents nearly the entire circulating coinage production combined at the Denver and Philadelphia Mints for calendar years 2001 and 2002. The milestone also represents a 13 percent increase in coins recycled and a 17 percent increase in the value of coins recycled by the company over the previous year.
The recycling of coins back into commerce appears to have had an affect on annual mintages. In 2002, the U.S. Mint produced 14.4 billion new coins, a drop from 19.4 billion coins struck in 2001 and the record 28 billion coins struck in 2000.
Despite the increases in coin recycling by Americans, Coinstar believes the amount of coin being recycled has not had a measurable impact in retrieving the $10.5 billion in coin that is estimated to be sitting idle in American homes. On average, that represents approximately $99 per U.S. household.
"Across America, we believe we are changing consumer behaviors and making a positive impact in coin production and recycling in two ways," said Rich Stillman, president of Coinstar Inc., based in Bellevue, WA.
"First, as more Americans dust off their spare change and cash it in, they are increasing their spending power, and secondly, as more out-of-circulation change is returned to local economies, certain public and private sectors can save money by having to produce and purchase less coin."
Based on anticipated coin-recycling patterns and the U.S. Mint's planned production schedule for 2003, Coinstar says it is on track to again recycle more coins than the U.S. Mint will produce during the year.
Coinstar continues to expand its network, and plans to install 1,000 new locations during 2003. In addition, the company expects to bring 3 million new users to Coinstar in 2003, and historically, nearly 80 percent of users return to convert their change on a regular basis. (Coin World 10/6/03)."
John Lyke's comments: "It amazes me how many people are willing to pay Coinstar's 9% service fee for the convenience of exchanging their coins for paper currency. My local bank provides this service for free."
Russ Kaplan's HEARTLAND ADVISER
1016 North 47th Avenue, Suite 11, Omaha, NE 68132.
Monthly, 1 year, $150.
Another disaster that didn't happen
Russ Kaplan: "The cigarette industry and cigarette stocks are a sensitive area for some people, but it provides us with good lessons on how the stock market works.
Not long ago the shares of Altria Group (MO, formerly Philip Morris) dived when it lost a $10.1 billion verdict and was required to post a $12 billion bond (money it didn't have and could have driven the company into bankruptcy). All during this the shares of Altria remained on Heartland Adviser's buy list while so many others were dumping the stock.
With over twenty years of investing experience, Russ Kaplan knows that the majority of disasters investors worry about do not happen. This is especially true of lawsuits where the outcomes look very different after negotiations or appeals courts.
On September 17 the shares of Altria soared 12% as the Illinois Supreme Court agreed to hear an appeal of the case and cut by 50% the $12 billion bond.
Despite all of the publicity and all of the lawsuits against cigarette companies, the amount paid out in lawsuits has been minimal, and we expect that to continue."
KEN'S HALLOWEEN EDITION
1721 Chandler Way, St. Charles, MO 63303.
Help is on the way
It's October, It's almost Halloween and it's time for Ken Schwab's annual newsletter of stock market insights and picks.
"As the November 2004 election nears and should the Dow go to the limit, I expect "low priced stock to charge up" as the public discovers the stock market again. Low priced Dogs are their favorites. This doesn't work but they never learn
For buying stock, this is about as good as it gets
Starting late October and especially one year before the election often becomes a wonderful buying period. If you waited for the so-called perfect buy point you would never get invested. Often October is called the turn month, through June standard run up
Last year off that great Fall Season low was easy picking. Now the easy money has been made, look to this year as the tough adventure to the election November 2004."
Ken's 5 Ultimate Buys
All of Ken's Ultimate 10 Buys from last year were up, a few doubling in price. Here are Ken's 5 Ultimate Buys for this year:
"Harrah's Entertainment (HET 41). When it drops below 40, it comes back up nicely. That's silent strength. They are expanding and upgrading their whole operation. They just purchased a large portion of the Horseshoe Casino. They're hoping to be king of casino loyalty with their rewards program.
Merck (MRK 53). Been backing and filling, believe the big rise is ahead. Expect it to take off soon. They spun off shares of Medco Health to Merck shareholders. They are just one new blockbuster drug away.
Ronson (RONC 2.59). Rising off a long base, now breaking up fast. There are only 3.9 million shares outstanding. A small float will no doubt cause explosive moves. The costly 7+ million Prometcor environmental cleanup is behind us. It took 10 years. Ronson Brand Lighters are offering new products. Ronson Aviation contributes big to earnings as well. "Drain on earnings behind us."
Spartech (SEH 22). Future growth for plastics is excellent. While waiting for the economy to pick up, the stock is holding its own. Encouraging is Investors business Daily accumulation/distribution rating. It was D+ and now improved to A. In other words being accumulated Showing silent strength.
International Inv. Gold A (Van Eck Funds 9.55). The Gold Fund. After all these 23 years, since 1980, it appears Gold has finally started a new confirmed bull market. Enough said."
The Bowser WARRANT REGISTER.
Supplement to the Bowser Report
P.O. Box 6278, Newport News, VA 23606.
Monthly, 1 year, $54.
Taser warrants are winners
Max Bowser: "Taser International (TASRW) has proven to be a Warrant Register star. When we first listed it in July '01, the common was $5.94 and the warrants $1.60. As of Aug. 22, the common had climbed to $22.50 and the warrants zoomed to $13.50.
Once more this demonstrates that on a percentage basis, the warrants usually outperform the common. In this case, the common appreciated 282%, but the warrants were up 744%.
An anomaly with Taser is that ever since we've been following this equity, insiders have been selling It's not suppose to work that way. Officials of the company are in a better position to anticipate the firm's future. But, it didn't work that way with this outfit.
In the post-9/11 atmosphere, the company is in the right business. It provides less-lethal weapons for use in law enforcement, private security, military and personal defense markets.
In the latest quarter (June 30), sales were $4.2 million and net income was $347,059. In 2001, in the same quarter, revenue was just $1.2 million. Also, the common got a boost because there are only 2.83 million shares. As another sign of its success, Taser is building a new corporate headquarters in Scottsdale, AZ. It paid $2.9 million for 4.5 acres."
INVESTMENT QUALITY TRENDS
7440 Girard Ave., Suite #4, La Jolla, CA 92037.
1 year, 24 issues, $310.
ConAgra Foods: Ripe
for purchase at Undervalue
Joseph McKittrick: "It is rare to see a company that produces quite so many products as ConAgra Foods (CAG). With literally dozens of brand names, ConAgra provides Americans with everything from the Thanksgiving turkey to the raw seed used by farmers to grow crops. Having recently sold its fresh beef, pork, chicken and canned seafood businesses, ConAgra has begun to focus on its successful higher margin products. Major remaining segments include packaged foods, food ingredients, and agricultural products.
Packaged Foods produces an exhaustive list of frozen, refrigerated, canned, and other shelf-stable foods. Among its many brands are Chef Boyardee, Hunt's, Healthy Choice, Banquet, Egg Beaters, Reddi-Whip, and Hebrew National. Fiscal 2003 saw sales decline 2% to $12.3 billion. The decrease was in part caused by low demand in food service and the sales of the canned seafood and cheese businesses. Brands showing sales declines included Hunt's, Armour, ChefBoyardee, and Butterball. Losses from foodservice include decreases in the sales of Mexican foods, frozen seafood, French fries, and specialty meats. In order to combat the poor economy, CAG plans to increase advertising, promotions, and improve the quality of some of its products.
Food Ingredients creates many of the ingredients used in the production of CAG processed foods. This segment produces spices, seasonings, blends and flavorings. ConAgra facilities also produce milled flour, corn, and oats. Among the risks in this segment are the fluctuating prices associated with the procurement of commodities. Last year, Food Ingredients sales increased $172 million to $2.2 billion resulting from beneficial commodities prices and increases in the sales of milled ingredients.
Agricultural Products represent another portion of CAG business. In addition to seed, this segment also produces a variety of chemicals and fertilizers. These products are sold on the wholesale market to farmers, as well as in retail outlets. Brands include Clean Crop, Savage, and Loveland Industries. Sales for fiscal 2003 declined 10% to $2.9 billion overall. The decline was in part due to a reorganization of product line and an ongoing push to change to a more profitable customer mix.
CAG fiscal first quarter results (the most recent) showed an overall decline in sales by 33%. As mentioned above, the company has sold its fresh meats and canned seafood brands, leading in part to the decline. Of particular interest to I.Q. Trends subscribers will be the fact that CAG recently announced its 29th consecutive dividend increase. The new payout represents a 5.1% increase in the company's quarterly dividend to $0.26/share.
Interesting Qualities To Note: ConAgra produces over 80,000 miles of Slim Jims per year. Recent market capitalization was $11.48 billion. ConAgra employs 63,000 people. Over the past five years, Hebrew National has doubled its household penetration. ChefBoyardee is found in 50% of American households with kids. Telephone: (402) 595-4000, www.conagra.com.
At a recent price of $21, ConAgra is in a Declining Trend with a 17% downside risk to an Undervalue price of $18. From current levels, CAG has a 211% upside potential to an Overvalue price of $66. With earnings growth likely to be slow until reorganization is completed, we hope to see ConAgra fall to its Undervalue range, which begins at approximately $19.50/share. In the meantime, CAG has indicated that it will address its debt, which increased fairly dramatically with the acquisition of International Home Foods. With ConAgra's best-selling brands and products, dividend increases, and track record of profitability we see a company ripe for purchase at Undervalue. Prudent investors should find shares of this company trading at historic buy levels in coming months."
Forbes/Lehmann INCOME SECURITIES INVESTOR
6175 NW 153 St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
Vineyard National Bancorp: Reasonable
tax advantaged dividend return
Richard Lehmann: "In search for tax advantaged preferreds we came across a new issue, Vineyard National Bancorp's 5.6% preferred which is also convertible.
Vineyard National (VNBC) is a holding company for Vineyard National Bank. The bank operates eight full-service branches located in the Inland Empire region of Southern California. They also have loan production offices in Manhattan Beach, San Diego, Beverly Hills and Irvine. The company recently initiated common stock dividends. This non-cumulative issue is convertible by the holder at anytime and could be called early if the common price exceeds $43.60 for 30 consecutive days for the second quarter 2003 Vineyard reported total interest income of $8.6 million compared to $4.5 million for the same period in 2002. Net income was $1.83 million versus $750 thousand in 2002. Total deposits increased to $434 million compared to $288 million, I like this issue for high-risk growth and income investors. The dividend is subject to the 15% tax rate. Buy at or below $27.00"
HENDERSHOT INVESTMENTS
11321 Trenton Ct., Bristow, VA,
1 year, 4 issues, $45.
Long-term investors
should hop on Harley-Davidson
Ingrid Hendershot: "Harley-Davidson, Inc. (NYSE HDI) is the parent company for the group of companies doing business as Harley-Davidson Motor Company, Buell motorcycle Company and Harley-Davidson Financial Services. Harley-Davidson Motor produces heavyweight street, custom and touring motorcycles and offers a complete line of motorcycle parts, accessories and general merchandise. Buell Motorcycle produces sport motorcycles in addition to motorcycle parts, accessories and apparel. Harley-Davidson Financial Services provides wholesale and retail financing and insurance programs to Harley-Davidson and Buell dealers and customers.
Exceptional Brand
A century ago, four young men were tinkering with internal combustion in a tiny wooden shed. They luckily didn't blow up the shed, but instead built a motorcycle that went on to drive more than 100,000 miles. Two of the men, William S. Harley, 21-years old, scrawled the words "Harley-Davidson motor Company" on the door of the shed, and a new brand was born.
Harley-Davidson's brand today is one of the most recognized brands in the world. The company enjoys legendary brand loyalty among its customers, who wouldn't dream of driving a bike without the distinctive Harley growl. Twenty years ago, the company decided to capitalize on this strong brand loyalty. The Harley Owners Group, fondly referred to as H.O.G, was formed and today boasts more than 700,000 Harley-Davidson enthusiasts across the globe. The H.O.G. name was rather fitting as Leslie "Red" Parkhurst broke 23 speed records on a Harley-Davidson racing bike back in 1920. The racing team's mascot, a pig, was carried on a victory lap after each race was won.
From making just three motorcycles in 1903, the company will produce more than 290,000 Harley-Davidson motorcycles in 2003. Even so, there will still be a long wait for the most popular bikes like the Fat Boy and Road King. Because of Harley's brand image, customers are willing to wait months and even years to obtain a custom bike and pay a premium to bootthat is the sign of an exceptional brand!
Roaring Growth
Celebrating its centennial, Harley-Davidson should achieve its 18th consecutive year of record sales and earnings in 2003. Over the past five years, sales have compounded at a roaring 18% annual rate with net income throttling up at an even speedier 28% annual growth rate, thanks to steadily expanding profit margins.
In the first half of 2003, HDI continued to zoom with sales rising a robust 21% and net income rumbling 47% higher. Second quarter gross margin increased to 36.4% from 33.5%, as gross margin was favorably impacted by wholesale motorcycle price increases, a richer product mix and foreign currency exchange rates. Gross margin in the second half of the year is expected to be lower due in part to startup costs associated with a new factory in York, Pennsylvania. Over the past seven years, HDI has made more than $1.5 billion in capital investments to ensure the company remains a market leader in the years ahead. Strong operating cash flow funded these capital expenditures with excess cash used for share buybacks and dividends.
Profitable Operations
Harley-Davidson recently boosted its dividend 14%, marking the 10th consecutive year of dividend increases. With a relatively low payout, HDI is likely to roll out further dividend increases. Harley-Davidson sits astride highly profitable operations. Return on invested capital has steadily improved from 15% in 1997 to 22% at the end of last year. Return on shareholders' equity has consistently exceeded 20% every year for the past decade, with ROE reaching an impressive 26% last year.
Topping a successful 100-year anniversary celebration won't be easy, but Harley-Davidson has already unveiled the 2004 Model Year motorcycles to its dealers. With a completely redesigned Sportster product line and 900 new parts and accessories. HDI is planning its biggest new product launch in history. This should help drive demand well in to the future. Long-Term investors should hop on Harley-Davidson, a HI-quality business with an exceptional brand, roaring growth and highly profitable operations."
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